Monday, March 12, 2012

Activation of the CAC for the benefit of 7 BN EUR?

According to statements by the Greek government, "subscription" to the bond swap was slightly over 85% when they decided to activate the CAC in order to get the percentage to slightly over 95%. Thereby, they increased the PSI-participation by an alleged 7 BN EUR.

Was that worth it for 7 BN EUR? (7 BN EUR out of about 370 BN EUR in total public debt).

With the stroke of a CAC, Greece threw out the window 2 years of fighting for the cause of avoiding default and making all sorts of silly financial acrobatics just for the sake of accomplishing that; months of negotiations with the IIF to work out the PSI; etc. etc. Put differently: having kept the financial world on its nervous toes for 2 years and now a default.

One wonders what the role of EU-elites was in this decision to activate the CAC. Did they steer the process into that direction? Or did Greece make a short phone call last Friday to say something like: "You know, we are only at 85% but we want to get to 95% so we activate the CAC. Just wanted to keep you informed. Bye, bye".

It’s not the CAC per see which is the issue. The issue is that the CAC was implemented post-facto with retro-active effectiveness. As I have pointed out before, that is the kind of thing which assures that foreign investors will stay away from Greece for a long time.

This blog has argued from the beginning that the process chosen by EU-elites was wrong. At the outset of the Greek crisis, in early 2010, they should have pushed for a debt rescheduling with existing private creditors with the EU providing the necessary Fresh Money. Instead of a haircut, evergreen bonds should have been issued for the amount of debt exceeding the 60% Maastricht-level. This would have required private creditors to write-down perhaps 50% (or more) of their loans but they would have maintained legal claim to 100% of it. If that had entailed a default, it would have served a good purpose.

As it turns out, private creditors are left with about 15% on their original investment (if the new bonds indeed trade between 20-30%) and they no longer have any further legal claims in case of an upside in the Greek economy.

And what does Greece have? A pyrrhic victory, albeit it a very impressive pyrrhic victory. The Greek government, with excellent legal advice, sat at the poker table with a stern face and every time the others came with a bluff, they seemed to be saying without the hint of an emotion: “I raise you, partner. Show me your cards!”

Mind you, Greece managed to square the circle: disbursement of the new funding achieved AND a default at the same time! Very impressive!

Greece now is on historic record for having caused the most giant haircut on sovereign debt ever. For not having shied away to even trigger retroactive CAC just to maximize the haircut by another 7 BN EUR or so.

It is a shame that the Greek government 2 years ago did not have the professional legal advisors whom Mr. Papademos hired when he assumed office. It they managed to achieve this pyrrhic victory now, they probably could have achieved miracles if they had been involved from the start. 

That doesn't change the fact, though, that Greece now has a pyrrhic victory!

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